The Art of the Guarantee
THE TWO BIG AUCTION HOUSES ARE EARNING RECORD PROFITS AS THE INCREASINGLY WEALTHY TOP 1% SPEND MORE ON ART. HERE’S WHAT INVESTORS NEED TO KNOW AS ONE OF THE SCENE’S PROMINENT PLAYERS CONTEMPLATES ITS RETURN TO THE PUBLIC MARKETS. By Garrett Baldwin
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n June 2019, French-Israeli entrepreneur and art collector Patrick Drahi took the Sotheby’s fine art auction house private in a deal worth roughly $3.7 billion. Drahi arranged to pay $57 per share, a premium of 61% over Sotheby’s closing price on June 14, 2019. About 91% of shareholders approved the offer. Domenico De Sole, then chairman of Sotheby’s, called the offer a “significant premium to market” for shareholders. But some of those former owners may now be looking back and wondering if it was such a good deal after all. Are they right to dream of a do-over and wish they had held out for an even higher price? Yes. Based on recent developments in the art and auction world, it appears that Drahi might have made the deal of a lifetime.
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In 2021, Sotheby’s chalked up the healthiest numbers in its 277-year history, thanks to an explosion in global wealth, innovation in digital artwork, a keen interest among millennials in acquiring art and a profitable sales strategy known as a “guarantee.” So with no auction houses currently trading publicly in the United States, an outcry could arise for one of the two big ones to return to the public markets. That could offer investors a way to take part in investment trends now limited to members of the top 1%.
A 13-FIGURE ASSET CLASS
Art itself is considered an alternative asset class, marked by illiquidity, exclusivity and opaque business practices. But the size of its market might surprise investors new to the sector. It surpassed $1.7 trillion in value in mid-2021, according to the Chartered Alternative Investment Association (CAIA). But the association notes that for years a lack of quantitative research has made it difficult to assign a precise number to the art market’s size. However, recent technological advances and newfound interest in alternative investments have helped create a more accurate valuation profile and fueled increased securitization of artwork. To put that $1.7 trillion figure into perspective, compare it with other alternative markets. CAIA said in 2021 that artwork comprises about $60 billion in annual transaction volume and represents about 75% of the total collectibles market, which also includes jewelry, watches, cars, wine and sports memorabilia. Art as an asset class is more than double the size of the $800 billion market for private debt and half the size of the $3.4 trillion private equity market, the July 2021 CAIA report said. Art has more value than the world’s $1.6 trillion in private real assets. And the art market stands to get even bigger.
A STRONGER DUOPOLY
It’s hard to overstate the strength of the art auction world in 2021. Sales for the three biggest players—Christie’s, Sotheby’s and Phillips—reached $6.5 billion in 2021, surpassing the record set in 2018, said art market research firm ArtTactic. They were also up roughly 74% year-overyear from COVID-plagued 2020 and up 21.7%
Luckbox | March 2022
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1/27/22 4:29 PM
